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Jan 18, 2012

To maximize retirement benefits, know the rules

NEW YORK (Reuters) – When the oldest baby boomers start turning 66 this year, they’ll be eligible to file for full Social Security benefits. But pollsters say many Americans plan to work well past that age, reflecting tough economic times and a general desire to reshape the idea of retirement.

What will working longer mean for the Social Security benefits of these seniors? How about Medicare, which has filing rules that are closely linked to those of Social Security and employment status?

These are important questions for a large portion of the U.S. population; about 10,000 seniors will turn 66 every day over the next 20 years. Social Security and Medicare both have detailed rules governing the interplay of work and benefits, and making the right decisions make a difference of thousands of dollars in enhanced Social Security benefits or the Medicare premiums that you pay.

I’ll be looking at how work and entitlement benefits are intertwined in two columns, starting today with Social Security.

Social Security’s rules encourage seniors to keep working at least until the Full Retirement Age (FRA) of 66. You can work and receive full benefits starting at that age. You can start receiving Social Security as young as 62, but if you’re working, $1 will be deducted from benefit payments for every $2 earned over $14,640. Although this is often described as a penalty, the withheld benefits are added back to your benefits, after you reach 66, using a complex actuarial formula.

Social Security offers another important incentive to forestall filing until at least 66. Benefits are reduced permanently for every year that you file before the FRA, and increased for every year that you wait to file beyond it, up till the age of 70.

That’s intended to keep the program actuarially fair, paying roughly equal lifetime benefits to everyone in the program. But delaying does deliver a major boost to monthly income – and it serves as an inducement to work longer and wait to receive benefits.

Jan 12, 2012

COLUMN: The 6 most important retirement moves for the young

Jan 12 (Reuters) – Young investors spooked by market volatility are continuing to shun equities (see). But is that any reason not to be thinking about saving for a secure retirement at a young age?

Absolutely not. A survey by Reuters of several dozen top retirement experts reinforces the importance of starting early for this simple reason: Time is on your side. Workers in their twenties and thirties have plenty of time to benefit from the magic of compound returns and to allow the market to bounce through its usual ups and downs.

Here are the six most important steps young savers can take to build retirement security:

1: START EARLY, START SMALL

If you read no further in this article, absorb this point: Above all else, get an early start. Nothing will have a greater impact on your success, due to the effects of compound returns over time. This will be true if historical market returns continue – even if you start small and even if there are bumps in the road. “A retirement account contribution of $5,000 today at age 23 will be worth nearly $300,000 when you retire at age 70, assuming a 9 percent return,” notes Bob Morrison, a financial planner in Denver.

The early start also is a very effective strategy if you’re worried about how much you can set aside.

Vanguard Investments tested scenarios and investment strategies for investors age 25, 35 and 45, aiming for a retirement age of 65. The investor who starts at age 25 with a moderate investment allocation and contributes 6 percent of salary will finish with 34 percent more in her account than the same investor who starts at 35 – and 64 percent more than an investor who starts at 45.

Jan 10, 2012

Candidate plans to fix Social Security and Medicare won’t work

By Mark Miller

(Reuters) – Here’s a political proposal that sounds reasonable: Fix struggling government entitlement programs by cutting the benefits of rich people, who don’t need them anyway. How about it, Jon Huntsman?

“Well, let me just say on entitlements – across the board, I will tell the upper income category in this country that there will be means testing,” Huntsman said in one of the New Hampshire GOP Presidential debates last weekend.

Huntsman isn’t alone there – several other GOP presidential candidates have endorsed cutting entitlements for the wealthy, and President Obama has flirted with it, too. But as seductive as it sounds, the math on means testing entitlements just doesn’t work, because there aren’t enough wealthy seniors to solve the long-term problems of either Medicare or Social Security.

Let’s look at Social Security first. The Republican candidates like to point to last year’s Bowles-Simpson deficit report, which estimates that half of Social Security’s long-range imbalance could be closed by cutting benefits. But Bowles-Simpson didn’t propose traditional means testing, which would take away benefits from people who have other available sources of income or resources. Instead, it looked at a senior’s lifetime earning history and changes the formulas used to determine benefits.

Most of the Bowles-Simpson cuts would fall on the middle class, not the rich. Ninety percent of seniors who had earned from $40,000 to $60,000 would see benefit cuts, and half of those would see reductions of 20 percent or more, according to the National Academy of Social Insurance (NASI).

Real means-testing of Social Security just can’t produce much in the way of savings, because the program’s benefits don’t go to the rich. Warren Buffett’s Social Security checks aside, only 2 percent of Social Security benefits go to seniors with non-Social Security income over $100,000. The largest monthly check amount in 2011? $3,123. The average check was $1,177. “A few rich people are getting Social Security, but nobody is getting enriched by Social Security,” said Virginia Reno, vice president for income security at NASI.

Jan 6, 2012

Are older workers getting in the way of the young?

Jan 6 (Reuters) – Today’s report on unemployment shows that the economy continues to gather steam – payrolls grew by 200,000 and the jobless rate ticked downward again, to 8.5 percent.

But young Americans are having a much tougher time finding work than older workers. The seasonally-adjusted jobless rate for workers over age 55 stood at 6.2 percent last month, compared with 9.4 percent for workers age 25 to 34.

And the overall workforce is getting more gray. Labor force participation by workers over age 55 has risen 11 percent since December 2007, and is projected to go higher as baby boomers try to restore retirement security by staying on the job longer. For example, 15 percent of Americans tell the Employee Benefit Research Institute they expect to work until age 70, up from 11 percent as recently as 2006.

All of which begs the question: In an economy where 20 million Americans are still out of work or underemployed, are older workers hurting the young by refusing to get out of the way? News stories on unemployment often say that they are – and intuition might tell you that’s so.

But any mainstream economist will tell you that’s just not how labor markets work.

“Many people who aren’t economists think there is only a finite amount of work to do,” says Jeffrey Zax, a professor at the University of Colorado who specializes in labor economics. “No one within the field of economics believes that, but it’s a perpetual myth that we’ve never succeeded in killing as we would like to.”

“Work comes from the ability to do something useful, and there is no fixed limit on how many useful things can be done,” he adds. “History shows we are always thinking of new things to do that are useful. So what determines how much work is possible is how much useful work there is to do.”

Dec 27, 2011

Retirement pros have questions for candidates

By Mark Miller

(Reuters) – The Republican Party has staged a mind-numbing 18 presidential debates this year, and more questions and answers lie ahead as the primaries and general election get into high gear in the new year.

The future of Social Security and Medicare will be central issues in the 2012 election. The ongoing debate about income inequality also is tied to retirement policy, since the erosion in middle class wages affects 401(k) savings, pension benefits and the ability to retire at all.

Yet these issues have yet to receive a serious airing in the debates, aside from accusations about Social Security Ponzi schemes and general threats to replace Medicare with vouchers.

In hopes of lifting the level of debate, I asked top retirement and aging policy experts this question: “If you could pose one question in a presidential debate to the Republican and Democratic nominees, what would it be?”‘

Their questions follow; debate moderators and panelists — feel free to plagiarize at will. I can promise you that none of these folks will mind a bit.

RETIREMENT INVESTING AND SAVING

Dec 27, 2011

Column: Retirement pros have questions for candidates

NEW YORK, Dec 27 (Reuters) – The Republican Party has staged a mind-numbing 18 presidential debates this year, and more questions and answers lie ahead as the primaries and general election get into high gear in the new year.

The future of Social Security and Medicare will be central issues in the 2012 election. The ongoing debate about income inequality also is tied to retirement policy, since the erosion in middle class wages affects 401(k) savings, pension benefits and the ability to retire at all.

Yet these issues have yet to receive a serious airing in the debates, aside from accusations about Social Security Ponzi schemes and general threats to replace Medicare with vouchers.

In hopes of lifting the level of debate, I asked top retirement and aging policy experts this question: “If you could pose one question in a presidential debate to the Republican and Democratic nominees, what would it be?”‘

Their questions follow; debate moderators and panelists – feel free to plagiarize at will. I can promise you that none of these folks will mind a bit.

RETIREMENT INVESTING AND SAVING

Q: In the last 10 years, the percentage of workers over age 55 who say they are “very confident that they will have enough money to live comfortably throughout their retirement years” is now half of what is was in 2001, according to the 2011 Retirement Confidence Survey sponsored by EBRI.

Dec 23, 2011

COLUMN: After payroll tax, 4 more issues to rally Democrats

Dec 23 (Reuters) – The payroll tax cut fight has reminded Democrats that they still have muscles, and that they can win a fight once in a while against Republicans.

But everything about this fight was upside down - Republicans fought a tax cut and posed as defenders of Social Security; Democrats fought for tax cuts and appeared ready to harm Social Security by tapping its dedicated revenue stream, the Federal Income Contributions Act (FICA) tax.

Democrats spent much of 2011 playing footsie with proposals that would weaken the social safety net for older Americans. The President has proposed raising Medicare’s eligibility age to 67 and perhaps means-testing the program. More recently, Sen. Ron Wyden (D-Oregon) co-sponsored a Medicare voucherization with Rep. Paul Ryan.

Here’s a better plan for Obama and the Democrats in 2012: Embrace your historic identity as the defenders of Social Security and Medicare, and run with it.

The timing couldn’t be better. Americans’ confidence in their ability to retire comfortably is at an all-time low, according to the Employee Benefit Research Institute. The U.S. Government Accountability Office (GAO) says the median level of financial assets for people near retirement age (55 to 64) is just $72,000 – enough to replace just 5 percent of pre-retirement income for the typical household. And that figure dates to 2007 – before the market crash.

The lowest-income Americans over 65 depend on Social Security benefits for 83 percent of total income, GAO found; middle income seniors depend on Social Security for 64 percent of total income.

Nearly a quarter of respondents to a recent AARP survey of Americans over age 50 said that that they or someone in their family had exhausted all of their savings during the recession. Among that group, nearly half reported that they delayed getting medical or dental care, or delayed or ceased taking medication.

Dec 20, 2011

List of top retirement plans has Southwest pilots flying high

Dec 20 (Reuters) – Southwest Airlines pilots are now free to retire about the country. That’s because they have the nation’s best 401(k) plan.

Brightscope, which rates and ranks 401(k)s, released its third annual yearend rating of the 30 best large plans today. The Southwest Airlines pilots’ plan took top honors this year, rising two spots compared with last year’s list.

Brightscope’s ranking system crunches more than 200 data points to simulate a 401(k) plan’s effectiveness at getting plan participants to retirement, and its annual top 30 list serves as a cautionary reminder that all 401(k) plans are not created equal.

If you doubt it, look up your own plan (for free) at the company’s website, which tracks nearly 50,000 plans and spans more than 30 million workers. There you will find a simple numerical score, based on analysis of the annual audit reports all plans file with federal regulators, and data provided by plan sponsors and record-keepers. You’ll find tremendous variation in key success factors, including plan cost, employer generosity and the quality of investment choices.

This year’s top 30 list underscores some positive trends in workplace retirement plans as companies rebuild from the crash of 2008-2009. The average Brightscope score among the top 30 increased three-quarters of a percentage point, and plan improvements made it more difficult to keep a spot on the list, says Mike Alfred, Brightscope’s CEO and co-founder.

Seven plans are new to the list, mainly reflecting the rising competitiveness among large employers. The newcomers include Wellington Management Co., Deloitte, Bristol-Myers Squibb Co., BASF , Ernst & Young, Google and Vanguard. Meanwhile, IBM’s 401k Plus Plan, which Brightscope singles out as a best-practices plan, slipped ten slots to number 22 – even though its overall rating only slipped to 84.7 from 86.2 a year earlier. “Their plan didn’t really get worse,” Alfred says. “The field is just getting much more competitive.”

Brightscope’s findings come in the wake of other reports indicating movement among plan sponsors to improve 401(k) plans. A recent survey by The Plan Sponsor Council of America (PSCA) found an unprecedented shakeup of plans, with just under 64 percent reporting that they had changed their investment line up in the past year.

Dec 13, 2011

How to benefit from new retirement fee disclosures

By Mark Miller

(Reuters) – Transparency will be coming to your 401(k) plan next year in the form of new quarterly reports that clearly disclose the fees you pay on investments. Now, the question is: What will you be able to do with the new-found information?

The new reports will turn up no later than the second quarter, and you’ll see information about fees being charged to your plan – and the actual dollar amounts charged against your own account and mutual fund choices.

The fee disclosure is mandated under new U.S. Department of Labor rules, and the numbers should be a real eye-opener. Fees vary widely among retirement plans – anywhere from well below one percentage point to a whopping five percent. Yet 71 percent of retirement savers don’t think they pay any investment fees at all, according to a recent AARP survey.

“I think the public will be shocked when they see the dollar amounts they are paying,” says David Loeper, author of “Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money.” “If I have $100,000 in my plan and I’m being charged two or three percentage points, it’s going to dawn on me that I’m paying $2,500 a year in fees that I didn’t know about.”

The disclosures pose some key questions for retirement savers. How should you interpret the new fee information? And, if the fees in your plan are too high, what can you do about it?

Nothing affects long-term retirement portfolio success more than fees. A 2010 Morningstar study found that fees trump performance as a predictor of success, with low-cost funds turning in much better returns than high cost funds across every asset class from 2005 through March 2010. The lowest-cost domestic equity funds returned an annualized 3.35 percent over that period, compared with 2.02 percent for the most expensive group.

Dec 7, 2011

Why Obama’s payroll tax cut extension is the best worst option

By Mark Miller

(Reuters) – The White House unveiled a countdown clock this week, tick-tocking away the days, hours, minutes and seconds to a December 31 deadline for extending and expanding the payroll tax cut. It’s a doomsday-style reminder that taxes will jump for an estimated 160 million Americans on January 1 if Congress doesn’t act.

President Obama is proposing a one-year extension and expansion of the tax holiday already in place on the employee share of the payroll tax, cutting it to 3.1 percent from the 2011 rate of 4.2 percent. He also proposes cutting the employer share of the tax to 3.1 percent from 6.2 percent on the first $5 million of payroll next year; there would be a complete employer payroll tax holiday for companies that grow their payrolls up to $50 million in a year by hiring new workers or raising the salaries of existing workers.

The payroll tax cut has the advantage of immediacy. It puts money in workers’ pockets – $2,170 next year for a married couple filing jointly with $70,000 in gross income, according to White House estimates. That’s a meaningful tax break, especially in hard times. And, most of the cut would go to middle and low-income workers. That means most of the money likely will be spent, which is good for the economy.

However, what’s good for the economy now could well be be bad for Social Security later.

The payroll tax actually is the line on your pay stub labeled FICA – the Federal Insurance Contributions Act. Although technically – and legally – a tax, the architects of Social Security always intended FICA as a premium payment that workers would contribute to their retirement. Franklin D. Roosevelt is famously quoted in the papers of one of his aides as saying the dedicated FICA revenue source was critical, because it meant “no damn politician can ever scrap my social security program.”

Thus far, Social Security has been held harmless from the FICA holiday; the losses have been made up from general federal revenue. But extending the cuts further does muddy the water on Social Security’s self-funding feature.

    • About Mark

      "Mark Miller is a journalist and author who writes about trends in retirement and aging. He has a special focus on how the baby boomer generation is revising its approach to careers, money and lifestyle after age 50. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (John Wiley & Sons/Bloomberg Press, 2010) and edits RetirementRevised.com. Mark is the former editor of Crain’s Chicago Business, and former Sunday editor of the Chicago Sun-Times. The opinions expressed here are his own."
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